The European Union Tobacco Markets Austerity Defined

The European Union Tobacco Markets Austerity Defined

Tackling a contentious problem: the large disparity in retail cigarette pricing.

By Dr. Iqbal Lambat, CEO Star Agritech Intl.

The European Union (EU) was established loosely after the Second World War by the six founding members—Belgium, France, Germany, Italy, Luxembourg and the Netherlands. That number was complemented in 1973 with the addition of Denmark, Ireland and the United Kingdom. Greece became the 10th member of the EU in 1981, with Spain and Portugal following five years later thereby creating the 12 Member European Union.

This treaty provided the basis for a vast six-year program aimed at sorting out the problems with the free flow of trade across EU borders, thus creating the “Single Market.” In 1993 the Single Market was completed with the “Four Freedoms” of movement of Goods, Services, People and Money freely across EU member borders. In 1995 the EU added three more new members, Austria, Finland and Sweden.

A small village in Luxembourg gives its name to the ‘Schengen’ Agreements that gradually allowed people to travel without having their passports checked at the borders. The political divisions between East and West Europe were finally declared healed when no fewer than 10 new countries—Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia—joined the EU in 2004, followed by two more—Bulgaria and Romania—in 2007.

Over the last 12 years since then, the EU has undergone tumultuous times: the bankruptcy of Cyprus, the economic meltdown of Greece, the rise of populism in countries such as Holland, Hungary and Poland. And, at the time of writing this article, UK Prime Minister Boris Johnson is threatening to leave the EU with or without an agreement with the EU under what has become referenced broadly as BREXIT.

What is transpiring in the European Union Cigarette and Tobacco markets and what does the future hold?

The Continued Decline of EU Cigarette Markets

Back in 2007, one would broadly refer to the EU bloc as a combined market of circa 725 Bn cigarettes of consumption. The five big +100 Bn stick markets of Germany, Spain, France, Italy and the UK accounted for slightly over 500 Bn of the 725 Bn or, observed differently, accounted for slightly less than 70% of total EU consumption.

In 2018 total EU consumption of cigarettes was estimated at 530 Bn sticks of which Contraband and Counterfeit (C&C) accounted for 45 Bn sticks or 8.5% of all sticks consumed in the EU.

The big 5 markets continue to remain the big 5 with a combined consumption of 303 Bn sticks or 57% of EU consumption in 2018.

The formation of the EU bloc has brought together nations of high wealth and nations of low wealth (and soon nations of no wealth!). This has resulted in a large disparity in retail pricing and government taxation on cigarettes. Using the Marlboro brand as a benchmark, this brand retails for € 11.25 per pack of 20 in Norway (highest) compared to 2.55 per pack in Bulgaria. The problem this causes is that a large quantity of cigarettes, tax paid in their countries, will flow to countries where the re-sale of the brand can be achieved successfully at fifty percent of the official selling price. Looking at the Bulgaria to Norway prices indicated above, it would be fairly lucrative to buy Marlboros at € 2.55 tax paid in Bulgaria and sell these at half the going price in Norway of € 5.60 per pack generating a personal profit ratio of at least 120%. Easy money!

Complicating this picture further are other non-EU countries located in Europe such as Russia, Serbia, etc. The same brand sells for 0.43 per pack in Belarus and 0.52 per pack in the Ukraine (one 20th of the price in Norway). These prices create widespread flows into the EU disrupting the official trade. While the new members of the EU have pledged to work towards reaching some form of retail price parity across the EU over the next few years, it will take some time before the Bulgarian Marlboro smoker will be prepared to pay 100% more as practiced in Italy or 350 % more as practiced in Norway.

Apart from disparate retail pricing is the complication on cigarette excise tax among member states. Again, clearly the newer members of the EU club have significantly lower taxes than the old guard countries such as Ireland and the UK. As a lot of this trickles down to purchasing power parity and “like for like disposable income”, there would be huge uproars and revolutions if an attempt to equalize excise tax across the Union were to be attempted.

Other factors driving down consumption in the EU are the continued bans that affect the consumer. These boil down to decreasing smokers’ freedoms as more and more public spaces are declared smoke free. Bans are almost in place in all 28 EU countries in the workplace, bars, restaurants and now moving into public parks and beaches. The EU is ahead of many regions around the world in general by providing access to some sort of smoking area in most airports. This is to be viewed positively given the large amount of time people spend in airports either before boarding or on connecting flights.

Also, the low visibility of cigarettes in points of sale are encouraged by Governments as having the effect of deterrents to smoking. This is a false claim with unproven success. Finally, the threat of plain packaging seems to have become second or third fiddle on the agenda of EU regulators. Perhaps the results of Australia’s spectacular failure to curb smoking through plain packaging has been the cause of this hesitation by EU regulators. (Plain packaging was introduced in Australia in December 2012).

Novel Nicotine Products (NNPs)

While vaping is well introduced in the EU countries, it has failed to generate the expected traction. European authorities have combined their embrace of e-cigarettes with tougher regulations—restricting marketing to children, for example, and imposing lower limits on nicotine content—that have made the new devices more acceptable to health officials.

Britain prohibits vaping companies from targeting teens. Real or fictitious characters that could appeal to youths are banned, as are depictions of e-cigarette users who appear to be under 25. The European Union also has lower limits on nicotine levels in e-cigarette fluid, permitting a maximum of 20 milligrams per milliliter, compared with 59 milligrams per milliliter in Juul Labs Inc.’s vape hits in the USA.

In order to enter EU markets such as Britain, the U.S. company has had to dilute its nicotine liquids there. Norway is the only EU country to have a total ban on e-cigarettes. Other EU countries tightening up regulations on e-cigarette usage are Hungary, Finland, Greece, Cyprus, Estonia Slovenia and Portugal.

The recent disclosure in the USA of several hundred e-cigarette smokers taken ill from using this product as well as several deaths attributable directly to e-cigarette consumption will serve to influence EU regulators on vaping products. HnB products have also seen little success in the EU. (It is reported that 90% of all PMI iQOS global sales volumes are in Japan!). Once the novelty factor has run its course, smokers return to combustion products.

X-Generation Potent

Finally, the X generation factor is more potent in the EU than elsewhere. Young adults want a cleaner lifestyle with less usage of alcohol and tobacco. Also, affordability plays a key role as prices of cigarettes are continuously on the rise. Over the past 12 years, the EU cigarette market has declined 27% or 2.25% per annum. At this rate of annual decline, the EU consumption would hit 386 Bn sticks by 2013, making the 28-country block smaller than the second largest cigarette market in the world—Indonesia. [TI]